Is pay raise or different job the key to increasing prosperity?

For the past four years, AmCham has had one message to officials and businesses interested in a more effective economic policy: if you want to have an effect, it is good to decide what that effect should be, and to measure it. That is why we took one step back from advocating specific policies, and urged political parties to set an economic goal, and then build a strategy and action plan based on that goal, and not based on the usual approach of asking each ministry what they want to do.

Over the last election period, two parties have developed two clear responses (most unintentionally) to this request for an economic policy direction. ANO has focused on making government more efficient: their economic approach is to treat the government as a business- that is, as an economic entity- that collects public wealth fairly and redistributes it effectively. CSSD has taken more time to define their economic goal, but over the last year, the prime minister and now the party have been bringing it into focus: the party has now set a goal of increasing the average wage by 45% over the next election period.

Both parties have done the public a great service by defining their economic purpose. Doing so helps citizens understand the reason for their party’s action, and helps to separate policy from politics. CSSD has gone one step further by setting a clear overall economic objective that serves as the baseline for assessing the effectiveness of their policy proposals and of their economic governance.

Wage growth is as good a measure of economic prosperity as most. GDP– and, better yet, GNI- growth tells you how much wealth has been generated, but it does not tell you how much it has spread throughout society. Wage growth gives you a better picture of how society has benefited. The theories of economics make it nearly impossible to sustain wage growth without sustaining similar levels of GDP growth, so GDP growth is a primary indicator and wage growth a secondary one, but we accept the challenge: how can the country create 45% growth in average wages over a four-year period that is sustainable- ie, that will not lead to higher unemployment and wage stagnation in longer-term future?

CSSD has supplied four answers to date. Raise public sector salaries. Increase taxes on above-average income (partly to pay for those salaries). Pressure foreign companies to spend more on wages. Invest more into local research and development to create more domestic value.

Our response is in the form a question: is the reason the average wage in the Czech Republic not risen at a faster rate due to lower wages or to the structure of jobs in the economy? There is no doubt that a Czech manufacturing worker makes less than his German counterpart. But is the bigger influence that the Czech Republic employs a higher proportion of plant operators, and the Germans as higher proportion of professionals?

Eurostat breaks occupational jobs into general categories. We have looked at the nine most significant: managers, professionals, technicians, clerical workers, service and sales workers, craftspeople, skilled agriculture/forest/fishery workers, plant/machine operators, and elementary (formerly unskilled) workers. We then split these nine categories into three groups: highest paid (managers, professionals, technicians), average paid (clerical workers, service/sales workers, craftspeople) and lower paid (agro/forest/fish workers, plant/machine operators, elementary workers). We compared the proportion of the workforce for each of these groups among a subset of EU member countries that include the Czech Republic’s regional competition and a few advanced, high-wage performers. How does the Czech Republic’s economic structure create jobs in those different groups, and how does it compare with other EU countries in the benchmark group?

What the numbers (see pdf download for tables) show is that the Czech Republic has one of the better, if not the best, workforce structures– a higher proportion of high-wage jobs and lower proportion of low-wage jobs– than other new members in Central Europe. The comparison to advanced EU economies, however, shows a significant gap. The oft-cited difference in average wage to Germany? One of the major sources of that gap likely is the 7% difference in high wage employ.

Are we getting closer? Unfortunately, no. The Czech Republic actually lost ground in high-wage employ since 2008, and Germany outgrew the Czech Republic by 5%.

Can CSSD’s expressed policies change the trends? It is way too early to come to a conclusion based on reality. Anecdotally, though, what is impacting management and professional jobs is not public sector salaries, but a combination of technology– communication technology is thinning management ranks and automation is replacing some professional positions. What is needed is to create more lean organizations to manage, which probably means emphasizing the growth of the small business sector. Raising the taxes on high income will not increase the number of management or professional jobs: the increased cost in theory will depress them. Pressuring foreign companies to pay more than the market will likely do nothing, and at worst could make domestic companies less competitive. Focusing on research seems by far the best bet: it not only provides immediate employment to high wage positions, but can increase the value-added of production, and therefore the take-home of plant operators, as well as create scores of new companies based on new technology. Let’s hope that the Social Democrats come to the same conclusion.

About us

CzechCompete is a platform for analyzing what economic policies will make the Czech Republic a top ten EU economy based on GDP per capita (PPS). It features data, policy proposals, interviews and opinions contributed by policymakers from the public sector, associations, businesses and academia. CzechCompete is managed by the American Chamber of Commerce in the Czech Republic.